The history of overdraft guidance goes back to 2005 with the Joint Guidance on Overdraft Protection Programs. The FDIC followed up with the Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance in 2010 and the FDIC Overdraft Payment Program Supervisory Guidance FAQ in 2011. In 2019, the FDIC provided more information relating to debit card holds and fees charged based on available, rather than ledger balances in its Consumer Compliance Supervisory Highlights. (more details below).
More recently, there has been a focus on the multiple representments first discussed by the FDIC in the Supervisory Guidance on Multiple Re-Presentment NSF Fees issued in August 2022. This document described the potential UDAP risk found when disclosures provided to customers did not fully or clearly describe the institution’s representment practices particularly if the same unpaid transaction might result in multiple NSF fees if an item was presented more than once. The Guidance also provided suggestions for institutions to mitigate the compliance risks of being cited for UDAP, and finally corrective action the FDIC recommended. These steps included:
- Take full corrective action, including providing restitution to harmed customers, consistent with the restitution approach described in this guidance.
- Promptly correct NSF fee disclosures (“per presentment” vs “per item”) and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers.
- Consider whether additional risk mitigation practices are needed to reduce potential unfairness risks; and
- Monitor ongoing activities and customer feedback to ensure full and lasting corrective action.
To iterate: correcting disclosures may not be enough. Failing to provide restitution for harmed customers when data on representments is available may not be considered full corrective action.
In October 2022 the CFPB issued Consumer Financial Protection Circular 2022-06: Unanticipated overdraft fee assessment practices which brought to light the focus on APSN, or “authorize positive/settle negative”. The FDIC followed this up in April 2023 with their own Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions. APSN focuses on the fact that even when the available balance on a consumer’s account is sufficient to cover a debit card transaction at the time the consumer initiates it, the balance on the account may not be sufficient to cover it at the time the debit settles. APSN should only occur at institutions where there is a Regulation E ATM/one-time debit card opt-in program.
The available balance is the ledger balance plus any deposits that have not yet cleared but are made available, less any pending (i.e., authorized but not yet settled) debits. The actual/ledger balance is the balance that is not reduced by any holds from pending transactions.
The CFPB and FDIC believe consumers expect that a transaction that is authorized at point of sale with sufficient funds will not later incur notes, but consumers generally cannot reasonably be expected to understand and thereby conduct their transactions to account for the delay between authorization and settlement—a delay that is generally not of the consumers’ own making but is the product of payment systems. Thus, when financial institutions assess an overdraft fee for a debit card transaction where the consumer had sufficient available balance in their account to cover the transaction at the time the consumer initiated the transaction and the financial institution authorized it, but due to intervening authorizations, settlement of other transactions (including the ordering in which transactions are settled), or other complex processes, the financial institution determined that the consumer’s balance was insufficient at the time of settlement These unanticipated overdraft fees are assessed on consumers who are opted in to overdraft coverage for one-time debit card and ATM transactions, but they likely did not expect overdraft fees for these transactions.
Not to be outdone, in April 2023 the OCC released Bulletin 2023-12: Overdraft Protection Programs: Risk Management Practices which addresses both topics previously mentioned and includes additional practices which reflect heightened risk:
- High limits or lack of daily limits on the number of fees assessed (daily limits on OD charges) and
- Sustained overdraft fees (daily overdraft fees)
The OCC encourages institutions under their purview to:
- assess and analyze the risks posed by the bank’s overdraft protection program activities.
- adjust the bank’s risk management practices; and
- incorporate oversight of overdraft protection programs into the bank’s compliance management system.
The OCC guidance also includes additional risk management principles, some of which are reflected in the 2005 Joint Guidance mentioned previously and encourages corrective action to address any flaws or weaknesses in their program.
Consider the following action items:
- Review the above-mentioned guidance against your institution’s program and address any deficient areas.
- If you have multiple representment issues, the FDIC instructions for avoiding a UDAP finding are your best bet at compliance and remember correct(ed) agreements, fee schedules indicating “per presentment” vs “per item” and refunds are all part of the solution.
- If you have an ATM/one-time debit card opt-in program, review disclosures to ensure you are properly disclosing the institution’s overdraft practices (actually, we recommend this even if you do not offer an opt-in) and verify what you are disclosing to the processes performed by your core provider.
All the guidance documents have another hot button in common: the lack of grace periods or notifications before charging overdraft fees. The technology exists for better timely notification before charging an NSF fee. Most institutions will mail notice of the NSF fee, however postal mail may not be considered “timely notification.” Institutions may wish to alert customers to a negative balance through the bank’s online banking product and remind customers to sign up for e-mail or text alerts that advise when an NSF fee has been assessed. These actions may help demonstrate the institution is providing the customer with sufficient notice of the NSF fee to bring the account to a positive balance before the representment.
And what about the Federal Reserve? While there has been no official pronouncement from the FRB yet, we have been advised that APSN fees have been criticized as unfair/deceptive during examinations.
We will leave you with an ominous item from both the OCC and the FDIC guidance: Disclosures may not fully address Dodd-Frank UDAAP and FTC UDAP risks associated with APSN transactions and related overdraft fees. Even if you disclose properly, it may not resolve a UDAP issue.
Questions about your overdraft program? TCA has A Better Way to help. Contact us at (800) 934-7347 or [email protected].
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